Finance Globe

U.S. financial and economic topics from several finance writers.
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Getting the Best Auto Financing

Nearly anyone can find a dealership that will give some type of financing for their next vehicle. But getting the best deal on a car loan - and saving money on those monthly payments - will require that you go in prepared.

Before you apply for any type of credit, it's always good to know where your credit rating stands. But for big-ticket items like autos and homes, it is an absolute must that you get your credit record as shiny and spotless as possible before you obtain financing, or you will pay dearly in the form of higher interest rates.

So first off, get a credit report to make sure there aren't any negative marks that could hurt your chances of getting good financing. Go to the only government-authorized source, to get your free credit report. You are entitled - by law- to a free report once a year from each of the three major credit reporting agencies - Experian, Equifax, and TransUnion. You can get all three at once or you can get one at a time several months apart to monitor your credit report regularly over the year

Clear up any inaccurately reported accounts by disputing them with the credit bureau and the reporting creditor. Deal with any negative items that are accurate by paying them off or getting them up-to-date, and be sure the creditor reports them as paid. It may take up to several months for your credit report to reflect these corrections, so get them dealt with in plenty of time before you need to buy your next auto.

Here are some important items to know about how companies calculate and use your credit score to determine whether you get credit, how much and at what interest rate:

When you apply for credit — whether for a credit card, a car loan, or a mortgage — lenders want to know what risk they would take by loaning money to you.

The credit score (such as a FICO score) summarizes your credit history to show lenders your statistical likelihood of repaying loans on time. Different credit bureaus may have different scores. Lenders may use one or all of these scores to make loan determinations.

As your payment history changes over time, your credit scores tend to change as well.

Taking steps to raise your credit scores can help you qualify for better rates from lenders. When you've got your credit report looking good, then it's time to shop around for financing. Yes, you could always let the dealer find financing for you when you find the car you want to buy, but it will usually cost you more that way. You can shop for an auto loan:
  • Brick-and-Mortar Banks and Credit Unions - You don't have to have an account at a bank to get auto financing from them, but a credit union will require that you are a member before they'll give you a loan. The financial institution that you personally do business with is a good place to start, but it pays to check around because you may just get a better deal somewhere else. In general, credit unions give better rates than banks, but not always. I am a member of a credit union but got a much better auto refinance rate from a bank I didn't even have a checking account with. A pre-approval from a financial institution also gives you the option to buy a vehicle from a private seller, where you may be more likely to get a better price than at a dealership.
  • Online Lenders - Internet-only finance companies typically offer very attractive rates and contract lengths. These loans can be handled entirely on the Web, and a check will typically be in the buyer's hands in just a few days. These loans also have the benefit of allowing you to buy your vehicle at either a dealership or from a private seller.
  • Dealer/Manufacturer - In general, dealer financing will cost you more, but there may be exceptions. Rates for used cars typically are significantly higher than rates for new cars. But those zero-percent deals often cost more than you realize because sometimes they require "dealer participation," which means the dealer is likely to raise the price of the vehicle. New car loans are also able to be financed over longer periods than loans for used cars, possibly making the monthly payment more affordable. But keep in mind the other long term costs if you go this route - the cost of new car depreciation, and the higher overall interest costs associated with a longer loan term.
If obtaining financing on your own proves difficult, you may need a co-signer. A spouse or family member with good credit may be able to help you get an auto loan by putting their name and their good credit on the line. This may be the only way for you to get a car loan if you haven't established their credit yet. But understand that if someone co-signs for you and you don't keep up with the payments, they will have to come up with the payments out of their own pocket, or their credit rating will suffer along with yours.

The best way to know what your exact costs will be is to first negotiate the price of the vehicle as though you're paying cash or have outside financing. Once those details are firm, tell the dealer what you've already secured (the length of loan and interest rate). Then ask the dealer if they can beat it.

It's great when you can start off your auto financing with the best deal out there, but sometimes there are situations where you just have to take what you can get when you need financing for your next car.

Maybe you didn't pre-shop for a loan and you went with one of the lenders the dealer set up for you. Maybe you bought your car before you knew to obtain financing beforehand. If this is the case, keep in mind that you can always look into refinancing sometime down the road, especially if you improve you credit over that time period. And refinancing an auto loan doesn't come with the typical lending costs associated with refinancing a home, so it can only save you money if you can get a better rate later.

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Friday, 29 September 2023

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